Record Surge in Auto Dealership Transactions Fuels Market Growth

Record Surge in Auto Dealership Transactions

The auto dealership buy/sell market has achieved unprecedented activity in the first half of 2024, with 204 dealership transactions completed, accounting for 381 franchises sold. This remarkable increase indicates a near doubling of activity compared to pre-pandemic averages and signifies a significant milestone for the industry.

Driving Forces Behind Increased Transactions

This surge in dealership sales can primarily be attributed to an influx of sellers aiming to capitalize on historically elevated blue sky values, a metric that measures the intangible value of a business’s ongoing operations. On average, blue sky values have increased by 74% from pre-pandemic levels. Moreover, the recent CDK cyberattack has prompted many dealers to consider selling their businesses in light of emerging technology and management challenges.

A Robust Buy/Sell Market Outlook

According to Erin Kerrigan, Founder and Managing Director of Kerrigan Advisors, the 2024 buy/sell market remains robust, driven by industry consolidation that shows no signs of waning despite high interest rates and the prevailing challenges of low vehicle affordability and slow electric vehicle (EV) sales. Buyers, including well-capitalized consolidators, are actively pursuing these deals to secure current elevated values and mitigate potential future valuation risks.

Evaluating Franchise Earnings Trends

Current blue sky prices, while down 17% from their peak, are still seen as highly attractive from a historical perspective. Following a significant decline in industry earnings since 2022, average dealership earnings have plummeted by 35% to $4.4 million per year. However, after accounting for the unique impact of the CDK cyber event, many dealerships are expected to stabilize their earnings, aligning closer to pre-pandemic levels.

Buyer Preferences Shifting Toward Quality

As profitability normalizes and cash flow remains strong, the top consolidators are finding themselves with record amounts of liquidity—approximately $7.4 billion recently, reflecting a $370 million increase since the previous quarter. However, buyers are becoming more selective regarding franchises and locations, preferring high-quality, low-risk franchises and often willing to pay premiums for those that meet these criteria.

Market Disparities Among Franchises

The disparity in supply between top-tier and underperforming franchises is evident, with a notable divide characterized as the haves and have nots. Concerns around OEMs’ electric vehicle strategies are making buyers cautious, particularly regarding brands heavily committed to EV production. Toyota and Lexus, projected to maintain the lowest levels of EV production at only 18%, continue to be among the most sought-after franchises.

Key Trends for the Second Quarter of 2024

Kerrigan Advisors has outlined four major trends expected to influence the buy/sell market into 2025:

• Increased Capital Deployment Internationally: Public dealership groups are increasingly looking outside the U.S. for attractive acquisition opportunities.
• OEMs’ Active Involvement: Original Equipment Manufacturers are becoming more involved in managing their dealership networks and buy/sell transactions.
• Financing Challenges for Weaker Franchises: Loan availability is tightening for underperforming franchises, leading to potential acquisitions being more challenging.
• Tech Challenges Prompting Sales: Many dealers are reconsidering their exit strategies due to mounting technology demands.

Furthermore, OEMs are increasingly exercising rights of first refusal (ROFR) to influence deal structures, which can potentially consolidate dealership ownership into fewer, larger groups, diluting the market diversity.

Shifts in Retail Network Strategies

The evolving approach of OEMs reflects a growing interest in ownership of customer relationships and data, reminiscent of Tesla's direct-to-consumer success. The shift in mentality among some OEMs involves standardizing their dealership networks, raising concerns about the future of independent dealers.

Commercial Financing Environment

The market has also witnessed a contraction in bank lending percentages to U.S. corporations, creating more stringent underwriting standards. These changes influence the commercial real estate sector and are expected to create further challenges in acquisition financing.

Technology Integration in Dealership Operations

Technology's role in creating data-driven sales strategies is leading many dealers to contemplate early exits from their businesses, as smaller dealerships may struggle to meet modern tech demands without significant operational changes. The critical need for resource investments in technology shocks many private dealers, leading them to weigh options for selling rather than adapting.

Conclusion: The Future of Auto Dealership Transactions

The landscape of auto dealership buy/sell transactions continues to evolve, indicating a dynamic market propelled by both opportunities and challenges. As adaptations occur within the industry, stakeholders should keep a close eye on market movements and anticipate further developments as 2024 unfolds.

Frequently Asked Questions

What major changes have occurred in the auto dealership industry?

The auto dealership market has seen an unprecedented surge in transactions, nearly doubling pre-pandemic activity.

How have OEM strategies influenced dealership sales?

OEMs are taking an active role in managing dealership buy/sell processes, impacting network diversity and ownership structures.

What are the key trends predicted for the buy/sell market into 2025?

Increased international acquisitions, tighter financing for weaker franchises, and a focus on technology integration are key trends.

Why are buyers becoming more selective in their franchise choices?

With many dealers focused on securing high-quality, low-risk franchises, buyers are willing to pay more for top-tier brands.

How might technology challenges affect dealership operations?

Many dealers may consider selling rather than investing in significant technological upgrades, particularly post-cybersecurity incidents.

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